A short note on Greece today.
There are many victims of Europe’s welfare-state driven crisis. The worst hit are those who have become deeply dependent on the welfare state for their daily survival. Once government started walking away from its promises, they took the hardest beating. And nowhere in Europe has government been more cynical in defaulting on promises than in Greece. We should therefore not be surprised to hear horror stories about the effects of austerity on the Greek people. This one from Enet English, a Greek news website, is just one in a long line of examples:
Greece is very close to ‘tearing down the vaccination barrier’, says Nikitas Kanakis, who heads the Greek section of the international humanitarian aid organisation Médecins du Monde. Thousands of children in Greece have been left unvaccinated because they and their parents have no health insurance, the Greek section of an international humanitarian aid organisation has said.
Greece has a single-payer system of sorts, with focus on employer-based coverage. If you have a job in Greece you are covered by the tax-funded IKA health insurance plan.Those how lose their job can continue coverage under a model that somewhat resembles the American COBRA system, with continued insurance coverage – provided of course that the person continues to pay for their insurance coverage.
If you do not have a job you are covered though through a different system referred to as ESY, or the National Health System of Greece. In theory, this means that poor children get coverage for their health needs through government; in practice, though, the past several years of austerity has damaged every entitlement system in Greece, including the health care system. So far there are no comprehensive studies of the accumulated effects of austerity on the Greek economy, but it is safe to say that no government entitlement system has been left alone. Ostensibly, access to tax-subsidized immunizations is among the austerity victims.
As always, government pretends to maintain the programs it has slashed funding for. This prevents the private sector from stepping in and replacing what government no longer provides. The root problem is not austerity – that is an ancillary problem – but the very existence of the welfare state. Do away with it, restore economic freedom and the Greek people will have a fighting chance to become prosperous again.
Sometimes it is easy to gauge the level of desperation over the crisis in Europe. The EU Observer provides two good examples, the first on unemployment:
Unemployment in the eurozone fell for the first time since February 2011, according to figures released on Friday (29 November). The jobless rate fell to 12.1 percent in October 2013, according to EU statistical agency Eurostat, down from 12.2 percent in September, leaving 19.3 million people out of work.
That sounds good until you start looking at the actual numbers from Eurostat. The truth is this:
As these seasonally adjusted monthly figures show, the American unemployment rate has come down 0.6 percentage points since the beginning of the year. During that time the EU has been practically stalled at eleven percent. The Euro area is not going anywhere either from its 12-percent level.
What the EU Observer elevates to a “fall” in unemployment is literally the reversal of the euro zone’s temporary uptick in September. To call this a fall in unemployment is about as honest as to use the warm weather at noon as a sign of global warming.
As always, we should also check in on youth unemployment:
Again, the U.S. economy handily beats Europe with a decline by 1.7 percentage points since January. If there is any trend in the European numbers, it is for the worse, a very good reason for Europe’s political leaders to not let themselves be blinded by the non-fall in total euro-zone unemployment.
As for the worst performers in this division, Greece has not reported youth unemployment since August (artificially holding down the euro number) when their rate was 58 percent. The October number from Spain is 57.4, the highest monthly Spanish rate thus far this year. Croatia reported a rate of 52.4 percent in September, also the highest for the year. Let us pray that when their October rate comes in, it bucks the trend.
Now for the second example of desperately promoted “good” news in the EU Observer story:
Meanwhile, on a mixed day for the eurozone economies, the Netherlands became the latest eurozone country to lose its triple-A credit rating from rating agency Standard and Poor’s. Germany, Finland and Luxembourg are now the only remaining countries to hold the top-rating. However, there was better news for Spain and Cyprus. Standard and Poor’s uprated Spain’s economic outlook to “stable” after data showed that its economy grew in the third quarter of 2013 after more than two years of recession.
That growth was over the previous quarter, and not in seasonally adjusted numbers. In short, it says nothing about what is happening on the ground. To find that out we have to compare the third quarter of 2013 to the third quarter of 2012, which gives us a Spanish GDP growth rate of -0.7 percent. In other words, it is still shrinking. It is the “best” figure in two years, but until we see an actual growth number in year-over-year quarter numbers there is no reason to believe the economy has turned a corner. Furthermore, with unemployment in general stuck at its high level and youth unemployment still climbing it is pointless to even think about an economic recovery.
I understand perfectly well that the Europeans want to get out of their deep, endless economic recession. But you do not get out of it by clinging to superficial economic data. You get out of it by turning a real macroeconomic corner. That, in turn, requires substantial reforms to the role that government plays in the European economy.
Never bark at the Big Dog. The Big Dog is always right. Over the past year I have explained repeatedly that Europe is in a permanent crisis, that the continent is turning into an economic wasteland and that the best way to define this new economic condition is “industrial poverty”. Today we get a hands-on reminder that I have been right all along. From Greek Reporter:
S&P Dow Jones Indices, said that Greece no longer classifies as a developed market. The general consensus among participants is that emerging market status is a more appropriate classification due to the following reasons: The Greek equity market lags behind the advancements in market practices typical of other developed markets. Dramatic and consistent reduction in market size over the past few years. Failed minimum credit ratings criteria: Greece is currently rated as B-; minimum is BB+ Failed market accessibility criteria: Restrictive securities borrowing and lending facilities. Lack of ease in transferability – market participants pointed out the difficulties in dealing with in-kind transfer and with off-exchange transaction-like facilities that make trading in the local market extremely challenging and impractical.
In short: from the viewpoint of the financial industry, Greece is no longer a first-world, industrial economy. But Standard and Poor were not the first ones to downgrade Greece. Back in June, Bloomberg.com reported:
Greece became the first developed nation to be cut to emerging-market status by MSCI Inc. (MSCI) after the local stock index plunged 83 percent since 2007. Greece failed to meet criteria regarding securities borrowing and lending facilities, short selling and transferability, said MSCI, whose equity indexes are tracked by investors with about $7 trillion in assets.
This is going to have serious long-term consequences for the Greek economy. The financial industry is the engine oil that keeps modern economies going. It is entirely possible that this will lead to a withdrawal of some levels of service from financial corporations. As a result there will be less foreign direct investment activity and a continued drainage of liquidity from the Greek financial system.
Lack of liquidity is a serious problem in a modern economy. One of the most important institutions in our industrialized world is the property right. The tradability of property rights constitutes the foundation of our modern monetary system: when we can put our property out on a functioning, continuous market, we can get a continuous evaluation of its value. We can also obtain liquidity without giving up our property rights – it is called collateral, or in the case of a corporation, the stock market. By allowing someone to hold a lien on our property in exchange for cash, we increase the liquidity level in both the business sector and in private households. This in turn allows a lot more flexibility in how we invest, save, consume and produce.
The key to maintaining a modern monetary economy with a high liquidity level is that there are always buyers and sellers ready to enter markets, such as the real estate market or the stock market. When few people want to buy and sell on the market, it becomes illiquid. An illiquid market becomes a high-risk market: lenders and investors are less certain they can get cash when they need to. Higher risk means higher credit costs, i.e., higher interest rates.
With a less-properly functioning credit market it becomes difficult for people to start businesses as well as for foreign businesses to invest in the country. This can quickly cause a long-term structural decline in the entire economy. I am not saying that it is over for Greece as an industrialized economy – on the contrary, I maintain that it will indeed remain industrialized – but I am suggesting that if this decline in the country’s financial system continues, its nature as an industrialized country will change dramatically. The Greek economy will freeze at a relatively primitive level, that it will remain there and that it will not see any notable growth in the foreseeable future.
Back to Bloomberg.com:
MSCI put Greece under review for downgrade in June 2012, saying restrictions on in-kind transfers, off-exchange transactions, stock lending and short-selling stopped the country from having a fully functional market. The probability of a demotion increased after Coca-Cola HBC AG, the soft-drink bottler that previously made up almost a quarter of the Athens Stock Exchange by weight, switched its primary listing to London in April. … “We’re already seeing money heading back to safe havens and the MSCI decision may exacerbate that,” Peter Sorrentino, who helps manage about $14.7 billion at Huntington Asset Advisors in Cincinnati, said in a phone interview. “Greece’s downgrade brings them back to the forefront and it’s a sign that the crisis in Europe is far from over.”
The trend of downgrading Greece to “emerging market” status actually began already in March. Back then Bloomberg.com reported that Greece had…
failed one or both of Russell Indexes’ economic and operational risk assessments each year since 2011, according to a note on the company’s website. The relegation will force managers to buy and sell shares to align holdings with their funds’ criteria. “Since the country began revealing unsustainable levels of public debt in 2009, it has been in an unfortunate economic tailspin that at times has threatened to pull apart the entire European Monetary Union,” according to a statement from Mat Lystra, Russell’s senior research analyst. While bailouts by Europe have eased its debt burden, “more than loan repayments will follow the diffusing of the crisis, since any opportunities in the Greek economy have become inherently riskier exposures for global investors,” Russell said. Greece is the first country Russell has cut to emerging from developed market status, according to Michael Gelormino, a spokesman in New York.
It probably won’t be the last. As I have reported on numerous occasions – see, e.g., this one about the debt crisis – the European decline has not stopped. It continues, though more quietly than earlier this year. But it does not matter how much or how little media writes about an economic crisis – macroeconomic facts don’t lie. Europe is becoming an economic wasteland of unseen proportions.
It is sad to watch, but unless we soberly look at what is happening, we will never be able to draw the right conclusions from it. We won’t learn the lesson. If we don’t learn the lesson we won’t be able to save the United States and other countries that still fly the flag of freedom and prosperity.
I recently expressed my deep concerns regarding the unstable political situation in Greece, concluding that the government’s attempt to ban or otherwise neutralize the neo-Nazi Golden Dawn party is a very risky game. while morally the right thing to do, and politically probably necessary, the potential for a violent backlash is very high. One reason is that many Golden Dawn supporters appear to be supporting the party because they want Greece out of either the currency union or both the EU and the euro.
Their motive is not hard to understand: it has now been five years since Greece entered the economic crisis, and at least four of those years have to the average Greek been dominated by EU-imposed austerity. In package after package, the EU, the ECB and the IMF have dictated bone-crushing spending cuts and prosperity-destroying tax hikes. Since Greece is a welfare state, government is deeply involved in almost every aspect of people’s lives. When it goes on an austerity rampage the effects are by necessity both far-reaching and painful for Greek families.
Today, Greece stands with one foot in the EU and one foot in social and economic chaos. Political extremism is growing, both in the form of terrorizing socialist political violence and growing political intimidation from Golden Dawn. At the same time, unforgiving austerity policies, aimed at stabilizing government debt, have been a complete and utter failure, Greece’s government budget is suffering from chronic deficits, partly because one quarter of the tax base, a.k.a., GDP, has vanished during the austerity years, and partly because a much larger portion of the Greek population depends on the welfare state now than was the case before the crisis.
The question is what the EU-ECB-IMF troika is going to do next. Before we seek an answer to that, let’s take a look at the Greek debt trajectory. This figure shows the Greek government’s debt as percentage of GDP per quarter since 2008:
The debt ratio rises steadily through 2011, then drops dramatically at the beginning of 2012. That is the point when the Greek government, aggressively “encouraged” by the Troika, wrote down its own debt.
When the write-down – effectively a partial default – was executed the Greek government owed 170 euros for every 100 euros of Greek GDP. That ratio was considered entirely unsustainable at the time, especially since the quarter-to-quarter increase in the ratio was at 3.3 percent. But the problem for the EU-ECB-IMF Troika is that the rise in the Greek debt ratio has not changed since the partial default – at least not for the better. Through the first quarter of this year the debt-to-GDP ratio has grown by 4.1 percent per quarter, putting the ratio at 160.3 for the first quarter of 2013.
Before the end of this year Greece will probably have a debt ratio that exceeds what it was at the partial-default point. Here are two scenarios:
The blue line represents a scenario where the Greek debt ratio continues to grow as it has during 2012 and 2013 thus far. The red line extends with a growth trajectory based on the ratio growth rate from 2010 and 2011, namely 3.3 percent per quarter.
As we can see, the difference is negligible. And even if we disregard the exceptionally high debt ratio growth from the first quarter of 2012 (9.3 percent) we still end up with a post-default debt ratio growth of 2.5 percent per quarter. In other words, it is only a matter of time before Greece is back in the same situation as it was in 2011, only this time with an even more tense political situation, an even higher level of economic despair among the people and a youth unemployment rate at a completely destructive 60 percent.
So, back to the question: what is the Troika going to do next? Part of the answer lies in Angela Merkel’s decisive victory in last week’s German elections. Merkel wants to save Greece, keep the currency union intact and put a smiley face on every EU citizen. As far as she is concerned, the Troika should continue to help Greece.
At the same time, Greece’s self-proclaimed saviors are running out of options. The partial debt default was evidently a disaster that has, at best, bought the Greek government one year of breathable air. No one this side of a lunatic asylum would try another debt default. But austerity has also been utterly ineffective. The Greek economy simply refuses to produce the result that the designers of austerity expected.
What to do? Well, the only workable solution is so radical it will never win even a remotely serious consideration from the Troika – at least not its two European comrades, the EU and the ECB. That solution would involve Greece leaving the EU, reinstating its own national currency, and a dedicated program to reform away the welfare state.
It is almost a given that the EU won’t let any of that happen. But that brings us back to what options the Troika has left.
Well, what options do they have left?
Nobody in his right mind wants Nazis to have a say in how a country is governed. Despite all its flaws and failures, the (Western) European parliamentary system has been good at keeping Nazis out of legislative influence over the past six or so decades. However, thanks to the current, depression-style economic crisis popular faith in the parliamentary system has suffered, especially in very hard-hit southern European countries. In Greece, of course, this led to the rise of the Golden Dawn Nazi party, and 2012 marked the first year since the Third Reich when Nazis once again set their feet in the halls of a European parliament.
For a while, Golden Dawn showed some restraint and did not overtly behave like Nazis. There have been scattered reports of them harassing illegal immigrants and engaging in confrontations with Communists. But it has been hard to distinguish the two groups since European Communists – who by the way have held parliamentary representation in almost every Western European country since World War II – themselves are prone to extra-parliamentary, violent behavior.
Needless to say, none of this excuses any violence committed by any member of the Golden Dawn, especially if it is in the name of his party’s ideology. But this does not seem to concern the Greek Nazis, whose penchant for street-level violence seems to be growing stronger. The EU Observer reports:
Greek officials are considering banning the ultra-nationalist Golden Dawn party after a member is said to have fatally stabbed a prominent left-wing musician at an anti-fascist rally in Athens. Greek public order minister Nikos Dendias told reporters in Athens on Wednesday (18 September) that the government would table emergency legislation seeking to outlaw the group, reports the Guardian. … Dozens of Golden Dawn members chased the 34-year old musician, Pavlos Fyssas, and his friends, from a cafe late on Tuesday evening. Fyssas was then stabbed in the chest, sparking anti-Golden Party demonstrations throughout Athens the next day. Witnesses of the attack said it appeared to be premeditated because the killer suddenly emerged from a vehicle during the assault.
This would essentially mean that Golden Dawn would have to meet the equivalent of American RICO standards, namely that the organization itself can only exist if its members commit crimes on a continuous bases. If that is so, then it makes sense to outlaw Golden Dawn. However, that is unlikely to stop the violence, especially since there is widespread problem in Greece with politically motivated violence from socialist groups, exemplified by the deadly firebombing of the Marfin Bank in 2010 and the Athens Mall bombing in January of this year. None of the leftist groups that carry out terror attacks on almost a regular basis in Greece is, after all, legal.
Furthermore, it is fair to question what Golden Dawn activists and voters will do if their party is abandoned. Evidently, their ideas, beliefs and ambitions have been solidified to such a degree that they can form a presence both in the Greek parliament and in Greek society overall. The EU Observer again:
Prime Minister Antonis Samaras and socialist Pasok party leader Evangelos Venizelos are said to have convened a special meeting to discuss how to strip the party of its influence and voter appeal … the leaders want the government to adopt a two-pronged approach using criminal law to help dismantle the group and techniques to efface its popular “anti-system” image among supporters. … The party, which saw members voted into the parliament in June, has been known to use violence and intimidation against those critical of its views. Last week, a group of 50-or-so Golden Dawn activists also used iron bars to beat up Communist party campaigners putting up posters in the Greek capital.
According to the EU Observer, Golden Dawn is the third largest party in Greece now (they came in fifth in the June 2012 election). This is ostensibly based on opinion polls, and if this is indeed true, the Greek government has a formidable task on its hands. Furthermore, Golden Dawn seems to have strong support among the ranks of the military and the police, and although there are allegations that the party has infiltrated the police, that may very well have happened with the tacit approval from the top of the police hierarchy.
Any action by the legitimately elected prime minister and his cabinet against the Golden Dawn would be morally right, given the party’s ideology and proneness to violence, but it would only make sense if they took similar actions against leftist groups whose long streak of political terrorism dwarfs what Golden Dawn has done thus far. If the issue is politically motivated violence to promote a totalitarian ideology – a worthy reason to act – then it has to be consistent across the board. Otherwise the Greek parliamentary democracy is in grave danger.
That said, the clock might have run out on Greek democracy anyway. If Golden Dawn indeed enjoys strong support among military and police, it is not inconceivable that they may bet on seizing power on a wave of anti-EU, anti-austerity sentiments. That would be disastrous, especially if the result would be a Nazi-leaning dictatorship. But as with the perennial economic crisis in Greece, which has carved away one quarter of the nation’s GDP and put its prosperity beyond rescue, it is entirely possible that the train to save Greece’s democracy has already left the station.
I pray to God I’m wrong. The Greek people has suffered enough already. But if I am right, then may this modern Greek tragedy be an alarming wake-up call for leaders of all welfare states: when the current economic crisis reaches the Greek boiling point, you must choose between the welfare state and democracy. You cannot have both.
Two of the modern world’s eternal questions are:
- When is government big enough for a statist? and
- How big is a welfare-state black hole?
The first question should be on the top of the agenda every time you talk to a statist, be it an American liberal, a European social democrat or any other breed of Homo Collectivus. As for the second question, we have an interesting little case study called Greece. Its welfare state has gobbled up two so called bailouts already, better known as rescue cash supplied by primarily German taxpayers. Each one of those bailouts, managed by the European Union, the European Central Bank and the International Monetary Fund, came with stern warnings to the Greeks to get their fiscal house in good order, and equally stern promises to German taxpayers that this was the last time they’d have to rescue another welfare state in the EU.
The Greek government, of course, did what it was told to do in order to get the bailout cash. It cut spending, raised taxes and laid off thousands of government workers. But because of the higher taxes private-sector economic activity contracted; because of reduced government spending consumers dependent on entitlements had less to spend; because of reduced government subsidies to select product, such as pharmaceutical products private companies on those markets lost sales. Last but not least, the laid-off government workers could not find private-sector jobs, for all the reasons just given.
This does not mean that the welfare state itself is worth keeping. Quite the contrary, the best way forward is to do away with the welfare state entirely. The Greeks have not yet decided to do so, but are instead trying their best to preserve it. They are trying to keep the very entitlement systems that have discouraged work and entrepreneurship for decades; as a result they also have to keep the taxes that, for decades, have added yet another layer of discouragement toward work and entrepreneurship. However, since the current crisis their GDP has been reduced by a staggering 25 percent, which means that they have to squeeze their welfare state into a much tighter tax base. That does not work, of course, especially with unemployment closing in on 30 percent for the entire workforce – and 60 percent for young workers – so the Greek government really only has one choice: to run perpetual deficits.
This is where the German taxpayer enters the scene again. They have already borne a big chunk of the burden of throwing more than 200 billion euros in two bailout packages down the hole of the Greek welfare state. But these packages, which together are about equal to the Greek GDP when it was at its top before the crisis, have proven to be totally inadequate. The Greek welfare state still runs a deficit, its debt is still piling up – and GDP is still contracting.
While this should not surprise anyone who has working knowledge of macroeconomics, it should really not be more difficult than common sense to put the pieces together: if you take money away from people and businesses, they are going to want to spend less and hire fewer people; if you continue, year in and year out, to do the same thing to the private sector, it will continue to respond in the exact same way.
As a result, government will get less tax revenues and have to spend more on entitlements such as unemployment benefits and poverty relief. The bailout cash only helped bankroll these entitlements, but when each of the one-time infusions ran dry the Greeks were back to the same situation again.
Long story short: austerity does not change the structure of the welfare state, but preserves instead the very programs that drive the deficit. Therefore, no one should be surprised that the German taxpayer is now once again called upon to bail out the Greek welfare-state consumer. The EU Observer reports:
A month before general elections in Germany, finance minister Wolfgang Schaeuble has broken the taboo of admitting that Greece will need a third bailout when the current one runs out, in 2014. “There will have to be another programme in Greece,” Schaeuble said on Tuesday (20 August) during a campaign rally in the northern-German town of Ahrensburg. As part of a third programme, he mentioned another lowering of the interest rates on the loans the eurozone has given to Greece. “They are not out of the woods yet,” he said.
Of course, when the first bailout was announced everyone promised that “there will be at least two more bailouts down the road”… Oh, that’s right. They promised quite the opposite.
EU Observer again:
Earlier this year, Germany’s insistence not to deal with a funding gap of almost €10 billion for 2015-2016 delayed the negotiations on the second bailout for Greece, as the International Monetary Fund (IMF) was reluctant to sign off on a programme that does not get the country out of its financial mess once and for all.
You have to sympathize with the IMF, whose management has to go to its main funders, primarily the United States, and ask for more and more bailout money. That can’t be an easy job. But at least they are not dealing directly with taxpayers (and as far as the U.S. government goes, they’ll just sell another stack of IOUs to China…) which is exactly what Germany’s Chancellor Angela Merkel has to do.
But on the more serious front, it is good that the IMF is asking for workable solutions to bring the Greek crisis to an end. Unfortunately, short of dismantling the welfare state there are no such solutions at hand. Since no one in either the IMF, the EU or the ECB is willing to try to sell the phase-out of the welfare state to the Greek government – let alone Greek voters – there will be no end to the Greek crisis until the country effectively collapses. Nobody can accurately predict when that will happen, but when it does, things will get ugly.
The problem for Germany’s taxpayers is that they cannot afford yet another Greek bailout. Since the majority of Germany’s political parties have lined up behind another Greek bailout in one form or another, voters in next year’s German election could switch in large numbers to EU-skeptical parties, such as Alternative fur Deutschland. That would be a change for the better and a signal to all troubled European welfare states to start re-thinking what they cannot afford. Because one thing is certain: if there is a third Greek bailout, it won’t be the last.
The latest economic data out of Greece spell more trouble for the country. The Greek news site Ekathimerini reports:
Greece’s economy shrank by 4.6 percent of gross domestic product in the second quarter of 2013, the Hellenic Statistical Authority (ELSTAT) said on Monday. This was the 20th consecutive quarter of negative growth for Greece. The economy had contracted by 5.6 percent in the first quarter.
Technically this means that economic activity grew in the second quarter. But all that is needed for an upswing is increased tourism during the summer season. There is nothing wrong with that, especially in a country like Greece where tourism is a big industry. But it is very difficult for a country to pull itself out of a deep recession – or on this case a depression – by relying on foreign visitors. There has to be domestic economic activity as well; as a sign of how unlikely that is to happen, the Greek statistics agency ELSTAT reports that construction has fallen by 50 percent – in one year.
More likely, the depression of the Greek economy will continue. A major reason is that the government is still using austerity measures to try to close the budget gap. As always, the immediate result of new austerity is indeed an improved budget balance, which Ekathimerini reports that Greece is enjoying right now:
Earlier, there was more encouraging news for the government on the fiscal front. Alternate Finance Minister Christos Staikouras said Greece’s central government achieved a primary budget surplus of 2.6 billion euros, or 1.4 percent of GDP, in the first seven months of 2013 against a target for a primary deficit of 3.1 billion euros, The reading for January to July excludes interest payments and the budgets of local government and social security funds.
In other words, it is a statistically convenient figure to present. It is a safe bet that the social security funds are running big deficits. If they are, there is yet more trouble coming down the pike for Greek taxpayers.
As a hint of that, enjoy this little story from Euractiv:
German opposition parties accused Chancellor Angela Merkel yesterday (11 August) of lying before elections next month about the risks of a new bailout for Greece, after a magazine reported the Bundesbank expects it will need more European aid in early 2014. Der Spiegel quoted an internal document prepared by the German central bank as saying that Europe “will certainly agree a new aid programme for Greece” by early next year at the latest.
How about that! Another truck load of taxpayers’ money dipped into the black hole known as the Greek welfare state.
This means two things. First, Bundesbank already has the architecture in place for another effort to plug the hole in the Titanic with chewing gum. Secondly, knowing as they do what is happening behind the scenes in the Greek economy, the Bundesbank is convinced that the trend from the last few years will continue on a steady downward trajectory. Any attempt by some media to spin today’s GDP and budget numbers in a positive direction will fall flat to the ground.
We have never before witnessed a modern, industrialized economy in macroeconomic free-fall like the situation Greece is in today. This makes it very difficult to predict when this process will end, and how. But we do know one thing: so long as Brussels forces the Greek government to continue with destructive austerity policies, there will always be enough fuel for yet another round of GDP contraction.
After years and years of bone-crushing austerity; after having lost 25 percent of its GDP; with six out of ten young and three out of ten of all workers unemployed; you’d think Greece would be out of its crisis, right? That is, if austerity was the right kind of medicine for their crisis.
That is a pretty big “if”, and it grows bigger for every year. As I have reported repeatedly, austerity is not the right medicine for the European crisis in general, and certainly not the right remedy for Greece. It has now been five years since the crisis broke out, and nowhere in Europe has a government been more devoted to spending cuts and tax hikes than in Greece (with the exception, perhaps, of Sweden in the ’90s). Alas, as the English-speaking Greek news site Ekathimerini reports, the result is a still-uncontrollable budget deficit:
Greece will not be able to return to bond markets next year to help plug an estimated 11-billion-euro financing gap that will start to open up, market sources said this week, contrary to earlier suggestions from the government and its European partners.
Greece has not been able to sell its treasury bonds on the open market for a long time. Its bonds were tossed on the financial junk yard more than a year ago when the country de facto – though not formally – went into bankruptcy. The EU-IMF-ECB troika rescued the Greek government with cash loans and demanded a continuation of austerity. They believed that such measures would reassure the bond market enough to let Greece return as a credible borrower.
The problem is that Greece has not accomplished any of the objectives sought by means of austerity:
- GDP growth forecast, adjusted for inflation, for 2013 and 3014 is -1.2 percent and -0.4 percent, respectively;
- Private consumption is expected to decline by the same numbers;
- From 2009 to 2012, government revenue increased as share of GDP from 38 to 45 percent of GDP, yet during the same time government spending has remained at 54-55 percent of GDP;
- In 2012 the Greek budget deficit was at ten percent of GDP for the third year in a row.
The fact that Greece has not seen a decline in government spending as share of GDP is sometimes taken as an indicator that they have not made any serious efforts at cutting spending. But they have, as data for government consumption shows. Here are the changes in percent, adjusted for inflation, in government consumption from 2010, including forecasts for 2013 and 2014:
There are two reasons why, despite these numbers, government spending does not fall as a share of GDP. The first is plain macroeconomics: even though government spending is the most inefficient way to get anything done in our economy, it is an indisputable fact that government-funded hospitals, schools and other services do produce some services. When we cut those services we also cut the number of people on payroll, the purchases of inputs (think medical instruments for hospitals and food for school cafeterias) and spending on other, related items. These cuts are felt, especially by local economies, where small businesses lose some demand and thus have to shrink their activities.
The second and more important reason is that the other part of government spending, namely financial transactions (welfare, unemployment benefits and similar income-security items), actually increases when the economy is in a decline phase. As people lose their jobs they go from being paid for work to being paid not to work. People who are paid for work, whether private or public employees, spend money in their local communities, pay taxes on their consumption and property, etc. Unemployed people spend a lot less (unless unemployment benefits cover 100 percent of your previous income which I don’t think is the case anywhere in the free world) and typically pay no income taxes on the benefits they receive.
In other words, as unemployment goes up government has to spend more money through its cash entitlement programs. This is one big reason why the Greek government is unable to close its budget deficit. It is also a major reason why there is again, as Ekathimerini reports, rising desperation in Europe over the black hole also known as the Greek government budget:
With pressure mounting on eurozone officials to find a solution to the 4.4-billion-euro shortfall the International Monetary Fund projects will kick in from August 2014, and widen by a further 6.5 billion euros in 2015, more debt relief now seems all but inevitable for Athens. “The troika will not likely be able to avoid new bailout discussions before the end of 2014 in order to plug the gaps, and is very likely to decide on an extension,” said Barclays in a research note. “We do not see how Greece could possibly return to the markets next year, even if recent developments have been very positive.”
Again: the troika has failed in achieving any of the objectives behind its relentless austerity policies.
As if to highlight the desperation mounting over the Greek economy:
European Union officials – who believe the size of the gap next year is somewhat smaller at 3.8 billion euros – see the issuance of short-term bonds as an option to make up the shortfall, alongside utilizing unused funds earmarked for the country’s bank recapitalizations and/or new loans. Bankers, however, say the country will struggle to convince investors to buy its bonds, especially given that further restructurings are not out of the question.
By “restructuring” they mean debt write-downs. Or, in plain English: the borrower unilaterally declares that today he owes his creditors less than he did yesterday.
But the threat of a new debt write-down is not the only problem in the way of utilizing the bank recapitalization funds. Many Greek banks are not in a shape to absorb the loss of recapitalization funds, and the reason has to do with the country’s terrible real-estate market. Behold another article at Ekathimerini:
Government and opposition MPs have reacted to suggestions that the coalition is considering lifting the restrictions on the repossession and auctioning of people’s main residence if they are not able to keep up mortgage repayments. Repossessions have been suspended in Greece since 2008. It is thought that the sale of some 200,000 homes has been prevented so far.
That is 200,000 homes that banks have invested money in – money that they in turn borrowed from someone. While the banks have to pay their loans back, mortgage defaulters are not paying them, and when the banks are prevented from selling the defaulters’ houses they lose big money. The banks, which lost enormous amounts on the government debt write-down, are slowly but steadily bleeding to death. Without recapitalization and without access to its assets on the real estate market they will inevitably go the way Titanic did.
As Ekathimerini explains, there seems to be little understanding of the exceptional consequences of a full-scale bank collapse in Greece:
Deputy Development Minister Thanasis Skordas suggested on Thursday that there could be a partial lifting on the ban from next year … New Democracy MP Sofia Voultepsi said there was no way she would discuss the auctioning of reposed [sic] homes. [Social Democrat party] PASOK deputy Paris Koukoulopous said Parliament would never accept such a measure. Opposition parties also raised concerns about the possibility of such a measure being introduced.
Long story short, the situation in Greece is as bad as it has ever been during the current economic crisis. The EU has failed to provide adequate help, the Greek governmetn is on i ts last straw of popular credibility and the banking sector is destined for collapse.
So long as Greece remains in the EU and the euro zone its government will be forced to continue to depress the economy with the same kind of measures that have turned the country into an economic wasteland. So long it continues with its austerity policies, the Greek government is undermining the last few pillars of support among the Greek people for the parliamentary system of government. Last year four in ten voters supported more or less totalitarian parties, which opens a frightening perspective on what may very well happen if the country does not very soon regain its fiscal and monetary freedom.
It has been said that those who cannot remember the past are condemned to repeat it. It has also been said that someone who repeats the same action over and over, expecting different results, is an idiot.
If so, the EU Commission is a bunch of condemned idiots.
Sorry for the colorful opening, but just when the Commission has started talking about backing off austerity, they are forcing Greece to put to work perhaps the most devastating austerity package to date. Without even a hint of remorse over the past, blaming instead the negative results of previous packages on “mistakes” by the Greek government, the Commission charges ahead with demands that Greece cut away 6.5 percent of its GDP in the next austerity round.
I am not even going to attempt to predict the social, economic and political fallout of this complete fiscal madness, though it might be a good idea to remember that in last year’s Greek election the Nazis returned to the European political scene. I will say this, though: the Germans tried a decade of austerity during the Weimar Republic. Greece is now six years down the same path.
Before we get to the report on more Greek austerity, let us first note a new report from Pew Research Center. It presents some seemingly bizarre data, showing that a majority of Europeans still support austerity:
The countries still backing cuts over spending included Italy and Spain, which are both in the grip of prolonged recessions made worse by their efforts to bring down government borrowing. On average, 59% backed further austerity in the survey, against 29% in favor of more spending to stimulate the economy.
You would expect the victims of austerity to demand something better. But in order to do so the Europeans would have to know of an alternative – and it does not exist in their world view. For a good decade now, the public policy debate in Europe has been almost entirely lopsided in favor of austerity. Everyone from leading economists to political leaders to business leaders have been telling the public for years that the alternative to austerity is Hell on Earth.
When people see no alternatives, then after a while they tend to believe that there are indeed no alternatives.
Besides, the very issue of austerity is technical in nature and not likely to stimulate the average Joe to go off looking for alternative views on his own.
One would think that the hardships suffered in, e.g., Greece and Spain would be enough to make the general public back off from austerity. After all, the benefits they have been promised from austerity never seem to materialize. This is a valid point, but at the same time, history is full of examples of man’s ability to accept and endure hardships in the name of some abstract goal. It will probably take an entire generation before Europeans start questioning the changes for the worse that they are now living through.
With this in mind, it is easier to understand why Greece – ground zero of European austerity – is entering yet another cycle of fiscal torture. From Fox Business:
Greece is on track to meet its budget targets this year and next but may have to make further cuts in 2015 and 2016, the European Commission said in a report that will provide the basis for a decision Monday on whether to release more bailout loans for the country. The report sums up the findings of the three institutions overseeing Greece’s bailout–the Commission, the International Monetary Fund and the European Central Bank–which sent a team of auditors to Athens earlier this spring to review the country’s finances.
As I explain in Austerity: Causes, Consequences and Remedies, a country will always see a reduction of its government deficit the year after an austerity package is implemented. Then, as the negative multiplier effects of austerity kick in, the budget improvement is reversed. That is why the European Commission is forecasting more austerity in 2015 and 2016. However, you only need to take a quick look at macroeconomic data from Eurostat to realize that the notion of no budget cuts in 2014 is optimistic.
And now, Fox News delivers the big number:
It is the first time in Greece’s three-year-old aid program that the country is deemed to have met its goals. In past years, a deeper-than-expected recession and government missteps led Greece to miss its targets. The draft notes that the Greek government has followed through on most of the austerity measures it promised for 2013 and 2014–also in sharp contrast with previous assessments of Athens’ efforts to ease its crushing debt load. ”The very large and highly front-loaded package of fiscal consolidation measures for 2013 and 2014–totalling over 6.5% of gross domestic product–agreed in the previous review has been largely implemented,” the report says.
Six and a half percent of GDP.
Let’s leave the technospeak behind for a moment. An austerity package of 6.5 percent of GDP means that government is going to increase what it takes from the private sector by 6.50 euros for every 100 euros that people earn. Not for every 100 euros it currently takes in – it is 6.50 euros for every 100 euros of GDP.
The 6.5 percent number is a net tax increase on the Greek economy. It does not matter what the combination is of spending cuts and tax increases: the Greek government is telling its taxpayers that it is going to raise the price of whatever it provides them by 6.5 percent of all the money that all taxpayers earn.
If all of the austerity comes in the form of spending cuts, and taxes do not go up, then government is saying “we are going to sell you a 2011 car at 2013 prices”; if all of the austerity comes in the form of tax hikes, and spending is not cut, then government is saying “we are going to sell you a 2013 car at 2015 prices”.
Either way, government will increase its net drainage from the economy by 6.5 percent of GDP, and front load the plan so most of it shows up in one year. All this in a country that has already lost 25 percent of its GDP in five short years, all due to austerity.
I would not want to set my foot in Greece over the next year.
Apparently, the EU Commission has an eerie feeling that something bad might come out of this. According to Fox Business they are quick to add fine print to their optimism:
Beyond 2014, the outlook is uncertain and depends “on the strength of the recovery and improvement in taxpayer capability to service their tax obligations,” the commission says. It estimates the country’s budget gap at around 1.8% and 2.2% of GDP in 2015 and 2016 respectively.
This is B.S., Barbara Streisand. They have made similar predictions in the past, all of which have turned out to be outlandishly optimistic. So long as they believe that austerity somehow will improve the performance for the Greek economy, they will continue to believe that the first-year effect of an austerity program will become permanent.
I would not want to be a Greek politician saddled with implementing this chainsaw massacre of an austerity program. Perhaps some of the elected officials in Athens are on the same page, or why else would they according to Fox Business be so eager to promise that “there will be no more belt-tightening”?
Fox Business does not elaborate on this. Instead they conclude their report with a couple of notable factoids:
The country is in its sixth year of a deep recession made worse by waves of austerity. Unemployment, already over 27%, is expected to continue rising.
So if they acknowledge that the waves of austerity have made the recession worse, then why doesn’t Fox Business ask the EU Commission why this particular austerity package would do the trick?
In case anyone is still in doubt what this new austerity package will do to the Greek economy and to Greek society, please re-read the statement above about unemployment.
The Greek government is sitting on one side of an open powder keg. On the other side the EU Commissioners are sitting, smoking big fat cigars. The Greek government is holding out an ashtray where the Commissioners are supposed to kill their cigars. It’s dark, so it’s hard to see the ashtray.
There’s the future of Greece for you.
After four years of austerity, with drastic government spending cuts and higher taxes, the euro zone countries should have been on a path back to prosperity by now.
That is, if austerity had been the right medicine.
It was not, though, and there is ample evidence to prove that, both empirically and analytically. Today we can add even more evidence to the pile: in the lastest study of unemployment, Eurostat reports that the euro-zone countries that have taken the hardest austerity beating exhibit the highest unemployment numbers. This is logical to anyone properly trained in economics, and it appeals to common sense. However, Europe’s political elite is apparently as baffled as your average Austrian economist. Euractiv reports:
Employment and Social Affairs Commissioner László Andor called new unemployment rates released by Eurostat yesterday (2 April) “unacceptable” and “a tragedy for Europe”. The eurozone has hit the 12% mark for job-seekers, compared to 7.7% in the USA.
The main reason why the United States does not have a higher unemployment rate is that we have yet to subject ourselves to fiscal torture, a.k.a., austerity. That said, unless Congress does something before the end of this year we are going to face a significant increase in taxes as Obamacare goes into full effect. That will undoubtedly cost us the fledgling recovery we are in now.
Back to Euractiv, which reports that the 12-percent level of unemployment in the euro zone is up from 10.9 percent a year ago:
In total, the number of job-seekers in February jumped to 19,071 million, almost two million more that the previous year. For the EU 27, the total number of unemployed stood at 26,338 million, more that two million more that in 2012. … “Such unacceptably high levels of unemployment are a tragedy for Europe and a signal of how serious a crisis some eurozone countries are now in. The EU and its member states have to mobilize all available instruments to create jobs and return to sustainable growth,” said Employment and Social Affairs Commissioner László Andor, as quoted by spokesperson Chantal Hugues.
This is typical hot air coming from a representative of the bureaucracy that has forced country after country into the dungeons of austerity. Greece has lost a quarter of its GDP in four years under the EU’s boots of an unforgiving combination of spending cuts and tax increases. Portugal has been brought to the brink of social unrest by similar policies, and some provinces in Spain are moving toward secession – again a result of reckless fiscal policies.
Now the same commission that authorized – not to say ordered – the jobs-destroying policies is demanding – and presumably soon ordering – more jobs to be created.
On one topic, though, the commissioner’s empty words do have a bit of substance. Euractiv again:
“Young people need more support to acquire the right skills to increase their chances of getting a job and finding vacancies that exist. This is why the Youth guarantee, agreed by EU ministers on 28 of February, must be put in place urgently,” Hugues added.
While a “youth guarantee” won’t create any jobs, the concern for the young is at least a sign that there is some sort of contact with reality in the Eurotarian hallways. Perhaps the good commissioner and his colleagues have seen enough of the surge in activity by the Nazis in Greece to realize what is about to happen in Europe?
The concern for the consequences of high youth unemployment is also reflected in an article in The EU Observer:
Unemployment among the under-25s is particularly high. More than one in two young people are without work in Greece (58.4%) and Spain (55.7%). In Portugal, it is 38.2 percent and in Italy 37.8 percent.
Europe is turning into an economic wasteland, right before our eyes. Years of increasingly invasive regulations and taxes, combined with a work-discouraging welfare state, laid the groundwork for economic stagnation. Then, as the Great Recession came sweeping across the world, deficits opened up in the government budgets of Europe’s over-bloated welfare states. In response, ill-informed and arrogant members of Europe’s authoritarian political elite – the Eurotarians for short – began demanding destructive austerity policies in return for deficit-funding grants and other forms of short-sighted support.
The price for this colossal economic mismanagement of an entire continent is now being paid by the young. The EU Observer again:
The high unemployment rates, particularly among the youth, have led politicians to increasingly speak of a “lost generation” with little prospect of finding work. “We are in a double dip recession. Unemployment is up, up and up. When is growth going to come?,” Bernadette Segol, the head of the European Trade Union Confederation asked recently.
A glimmer of hope, though:
She suggested the persistent focus on austerity measures is leading to “doubts” about the benefits of belonging to the European Union. The eurozone’s growth prospects also compare badly with other regions. While the 17-nation currency area economy is expected to contract by a further 0.3 percent this year, the US economy is expected to grow 1.7 percent in 2013. China’s GDP is growing at about 8 percent a year.
I would not take the Chinese number very seriously. There is still a lot of political inflation in growth numbers coming out of that country. The ruling communist party demands regional leaders to “produce” certain levels of growth year after year. If the regions don’t deliver, their leaders are punished. Therefore, in order to keep their jobs and remain in good standing with the rulers in Beijing, many regions simply report the growth rates that the commycrats want.
That said, the Chinese economy would only have to grow at two percent per year to do better than the European economy – in itself a fact that speaks volumes to the complete and utter disaster that is unfolding in the Old World.
And worst of it all is that it is entirely politically generated. A Godzilla-size government filled with over-paid, politically arrogant bureaucrats listened to Austrian economists who suggested that austerity was the way forward. From the deliberate destruction of economic activity would, the Austrians said, rise a phoenix of prosperity and jobs.
Of course, that would all happen in the long run.
Europe’s young are waiting to learn just how long that run is going to be.